Many firms will have to take a hit on the bottom line to cover pension shortfalls
The Bank of Canada has raised a red flag about underfunded pension plans and said many companies will likely have to take a bottom-line hit to cover the shortfall.
In its publication Financial System Review, released in June 2003, the bank warned “the persistent weakness in stock markets has significantly undermined the financial health of corporate pension plans in aggregate, both in Canada and elsewhere. The unfunded portion of corporate pension plans represents a potential claim on the cash flow of corporations, although the magnitude and timing are often unclear.”
A drain on financial resources
The Bank of Canada said the huge deficits could represent a significant drain on corporate financial resources.
But a key issue is the timing and magnitude of the deficits. Not all estimated shortfalls have to be met immediately.
“In practice, firms’ contributions will be influenced by a number of factors, including their financial objectives, regulatory requirements and changes to the market value of plan assets and estimated pension liabilities,” the report stated.
Evidence from the U.S. and the U.K., however, points to a significant increase in employer pension contributions in both countries. Credit Suisse First Boston calculated that U.S. firms tripled the amount they paid into pension plans in 2002 to $46 billion (U.S.) The Bank of Canada speculated that some of this influx of cash may have been due to regulatory requirements, a significant portion was likely voluntary, perhaps in reponse to market commentaries or to pressure on credit ratings.
Impacting business operations
The bank said pension liabilities have traditionally received only limited attention. But they can interact with other situations to make difficult situations even worse.
For example, the bank said credit ratings firms have increasingly focused on the impact of pension shortfalls, citing them as a significant factor in the placement of a number of firms on credit rating review and in some recent credit rating downgrades.
Problems concentrated in some industries
A U.S. study by Credit Suisse First Boston and Standard & Poor’s showed companies in the S&P 500 Index with defined benefit pension plans had a net deficit in excess of $200 billion (U.S.) at the end of 2002.
A significant portion of the underfunding is concentrated in a few industries, such as the automotive industry, that have relatively “mature” plans where significant payouts are likely to occur at an earlier stage, the Bank of Canada said.
Information available on the overall position of Canadian corporate pension plans paints a picture similar to that of the United States. Aggregate funding positions have moved to a net deficit in 2002 from a roughly neutral position in 2001 and a net surplus in 2000.
A recent study by the Globe and Mail showed that 104 Canadian companies with defined benefit pension plans had an overall deficit of $19 billion Cdn in 2002, with about 75 per cent of the plans in an underfunded position. In 2001, the funding position for the same set of companies was a net deficit of $1 billion.
The Office of the Superintendent of Financial Institutions, Canada’s federal regulator, now has about 75 corporate pension plans on its watch list, up from 50 in late 2002, according to a report in the Toronto Star.
A study conducted for the Association of Canadian Pension Management released in May found underfunding of corporate pension plans in Canada to be about $225 billion. That translates into one-fifth of Canada’s gross domestic product. That study, conducted by Mercer Human Resource Consulting, Watson Wyatt Worldwide and Towers Perrin, looked at 1,029 public and private pension plans with a total of $275 billion in assets at the end of 2002.
In its publication Financial System Review, released in June 2003, the bank warned “the persistent weakness in stock markets has significantly undermined the financial health of corporate pension plans in aggregate, both in Canada and elsewhere. The unfunded portion of corporate pension plans represents a potential claim on the cash flow of corporations, although the magnitude and timing are often unclear.”
A drain on financial resources
The Bank of Canada said the huge deficits could represent a significant drain on corporate financial resources.
But a key issue is the timing and magnitude of the deficits. Not all estimated shortfalls have to be met immediately.
“In practice, firms’ contributions will be influenced by a number of factors, including their financial objectives, regulatory requirements and changes to the market value of plan assets and estimated pension liabilities,” the report stated.
Evidence from the U.S. and the U.K., however, points to a significant increase in employer pension contributions in both countries. Credit Suisse First Boston calculated that U.S. firms tripled the amount they paid into pension plans in 2002 to $46 billion (U.S.) The Bank of Canada speculated that some of this influx of cash may have been due to regulatory requirements, a significant portion was likely voluntary, perhaps in reponse to market commentaries or to pressure on credit ratings.
Impacting business operations
The bank said pension liabilities have traditionally received only limited attention. But they can interact with other situations to make difficult situations even worse.
For example, the bank said credit ratings firms have increasingly focused on the impact of pension shortfalls, citing them as a significant factor in the placement of a number of firms on credit rating review and in some recent credit rating downgrades.
Problems concentrated in some industries
A U.S. study by Credit Suisse First Boston and Standard & Poor’s showed companies in the S&P 500 Index with defined benefit pension plans had a net deficit in excess of $200 billion (U.S.) at the end of 2002.
A significant portion of the underfunding is concentrated in a few industries, such as the automotive industry, that have relatively “mature” plans where significant payouts are likely to occur at an earlier stage, the Bank of Canada said.
Information available on the overall position of Canadian corporate pension plans paints a picture similar to that of the United States. Aggregate funding positions have moved to a net deficit in 2002 from a roughly neutral position in 2001 and a net surplus in 2000.
A recent study by the Globe and Mail showed that 104 Canadian companies with defined benefit pension plans had an overall deficit of $19 billion Cdn in 2002, with about 75 per cent of the plans in an underfunded position. In 2001, the funding position for the same set of companies was a net deficit of $1 billion.
The Office of the Superintendent of Financial Institutions, Canada’s federal regulator, now has about 75 corporate pension plans on its watch list, up from 50 in late 2002, according to a report in the Toronto Star.
A study conducted for the Association of Canadian Pension Management released in May found underfunding of corporate pension plans in Canada to be about $225 billion. That translates into one-fifth of Canada’s gross domestic product. That study, conducted by Mercer Human Resource Consulting, Watson Wyatt Worldwide and Towers Perrin, looked at 1,029 public and private pension plans with a total of $275 billion in assets at the end of 2002.
